U.S. financial scandals seen sparking 2010 zeal
The year of the Ponzi scheme will be followed by heightened regulation and more aggressive prosecutions, experts say, as U.S. officials respond to past failures.
Bernard Madoff's massive $65-billion fraud grabbed most of the headlines in 2009, but other schemes that paid early investors with money from new victims came to light as the recession dried up new money and Madoff-inspired vigilance boosted awareness.
As 2010 approaches, regulators and prosecutors are scrambling to uncover and pursue more fraudsters, while lawmakers seek to close regulatory gaps through legislation and give enforcement officials more resources.
John Coffee, a law professor at Columbia University, said the Securities and Exchange Commission became a significantly tougher enforcement agency in 2009 and will probably issue lots more criminal referrals next year.
The brief era of light-touch regulation... is gone, apparently, he said.
Big-time Ponzi cases brought by the SEC in 2009 included one against Texas financier Allen Stanford, who was accused of masterminding a $7-billion Ponzi scheme through his offshore bank on the Caribbean island of Antigua. He was also indicted on criminal charges and has pleaded not guilty.
Former SEC Chairman Harvey Pitt, who headed the agency from 2001 to 2003, said the scams underscored the failure of the regulatory system to provide the checks and balances needed to deter financial misconduct and to detect it early.
I think this has been an incredibly difficult year, he told Reuters Television. We've seen a lot of financial scandals, a great deal of misconduct, an economic meltdown and a concerted push now for meaningful regulatory reform.
Coffee said civil and criminal cases in the pipeline will result in monetary penalties in 2010 but probably will involve people lower in the food chain.
While the SEC filed 664 civil complaints in the past fiscal year -- and has pledged to maintain an aggressive enforcement regime in 2010 -- few major criminal actions related to the financial meltdown were brought by the Justice Department -- and some it did bring fizzled out.
In November, a jury acquitted two former Bear Stearns hedge fund managers of fraud in the first major prosecution arising from the collapse of mortgage-backed securities.
And just a few weeks later, a U.S. judge tossed out criminal and civil charges against Broadcom Corp's
The failed prosecutions do not bode well for other high-level prosecutions or civil settlements, Coffee said.
I'm fairly dubious we're going to see any CEOs. I don't think the evidence has been developed.
For William Black, a white-collar criminologist at the University of Missouri-Kansas City and a senior financial regulator during the savings and loan crisis two decades ago, the real scandal of 2009 was the failure to even have an indictment, much less a conviction, of any of the major senior insiders at the nonprime lending specialists.
And the second biggest scandal... would be the regulators that didn't bark, he said. You can't get effective criminal prosecutions on any large scale against sophisticated frauds of this nature without very effective regulators.
In a bid to restore investor confidence, President Obama in May signed the Fraud Enforcement and Recovery Act, aimed at cracking down on the kinds of mortgage fraud and predatory lending that triggered the financial crisis.
Congress is expected to pass additional legislation early in 2010 to overhaul the financial regulatory system and give the SEC and other watchdog agencies more resources and authority to police shadowy corners of the financial markets.
I'd say there will be new people, more money and a sense of urgency about needing to project a strong cop on the beat, if only to increase and restore confidence in the markets, said David Martin, a securities lawyer at Covington & Burling.
(Reporting by Dan Margolies; Editing by Tim Dobbyn)
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